Using transaction data from Indonesia, this paper shows that domestic investors have higher profits than foreign investors. In addition, clients of global brokerages have higher long‐term and smaller medium (intramonth) and short (intraday) term profits than clients of local brokerages. This suggests that clients of local brokerages have a short‐lived information advantage, but that clients of global brokerages are better at picking long‐term winners. Finally, domestic clients of global brokerages have higher profits than foreign clients of global brokerages, suggesting that the combination of local information and global expertise leads to higher profits.
This paper documents strong evidence for behavioral biases among Chicago Board of Trade proprietary traders and investigates the effect these biases have on prices. Our traders appear highly loss‐averse, regularly assuming above‐average afternoon risk to recover from morning losses. This behavior has important short‐term consequences for afternoon prices, as losing traders actively purchase contracts at higher prices and sell contracts at lower prices than those that prevailed previously. However, the market appears to distinguish these risk‐seeking trades from informed trading. Prices set by loss‐averse traders are reversed significantly more quickly than those set by unbiased traders.
We examine the relation between institutional holdings and payout policy in U.S. public firms. We find that payout policy affects institutional holdings. Institutions avoid firms that do not pay dividends. However, among dividend‐paying firms they prefer firms that pay fewer dividends. Our evidence indicates that institutions prefer firms that repurchase shares, and regular repurchasers over nonregular repurchasers. Higher institutional holdings or a concentration of holdings do not cause firms to increase their dividends, their repurchases, or their total payout. Our results do not support models that predict that high dividends attract institutional clientele, or models that predict that institutions cause firms to increase payout.
This paper develops a theory of strategic trading in markets with large arbitrageurs. If arbitrageurs are not well capitalized, capital constraints make their trades predictable. Other market participants can exploit this by trading against them. Competitors may find it optimal to lend to arbitrageurs that are financially fragile; additional capital makes the arbitrageurs more viable, and lenders can reap profits from trading against them for a longer time. The strategic behavior of these market participants has implications for the functioning of financial markets. Strategic trading may produce significant price distortions, increase price manipulation, and trigger forced liquidations of large traders.
Acquiring‐firm shareholders lost 12 cents around acquisition announcements per dollar spent on acquisitions for a total loss of $240 billion from 1998 through 2001, whereas they lost $7 billion in all of the 1980s, or 1.6 cents per dollar spent. The 1998 to 2001 aggregate dollar loss of acquiring‐firm shareholders is so large because of a small number of acquisitions with negative synergy gains by firms with extremely high valuations. Without these acquisitions, the wealth of acquiring‐firm shareholders would have increased. Firms that make these acquisitions with large dollar losses perform poorly afterward.
This study employs a new data set from art auctions to examine the relationship between auctioneer presale price estimates and the long‐term performance of artworks. We find that the price estimates for expensive paintings have a consistent upward bias over a long period of 30 years. High estimates at the time of purchase are associated with adverse subsequent abnormal returns. Moreover, the estimation error for individual paintings tends to persist over time. These results are consistent with the view that auction house price estimates are affected by agency problems and that some investors are credulous.
We test the theoretical equivalence of credit default swap (CDS) prices and credit spreads derived by Duffie (1999) , finding support for the parity relation as an equilibrium condition. We also find two forms of deviation from parity. First, for three firms, CDS prices are substantially higher than credit spreads for long periods of time, arising from combinations of imperfections in the contract specification of CDSs and measurement errors in computing the credit spread. Second, we find short‐lived deviations from parity for all other companies due to a lead for CDS prices over credit spreads in the price discovery process.
We develop a corporate bond valuation model that takes into account both the risk of early default and the risk generated by lack of liquidity and marketability. Randomly matched investors who have heterogeneous prior beliefs about the value of the firm in bankruptcy bargain for the price of the asset in a secondary market. The liquidity and marketability risk is shown to be a function of the heterogeneity of investors’ valuations, the average belief about the cost of bankruptcy and the bargaining power of bondholders. The model also captures the fact that, soon after the issue, a bond is relatively liquid and later becomes relatively illiquid depending on the underlying asset value.
We study pre‐trade transparency by looking at the introduction of NYSE's OpenBook service that provides limit‐order book information to traders off the exchange floor. We find that traders attempt to manage limit‐order exposure: They submit smaller orders and cancel orders faster. Specialists' participation rate and the depth they add to the quote decline. Liquidity increases in that the price impact of orders declines, and we find some improvement in the informational efficiency of prices. These results suggest that an increase in pre‐trade transparency affects investors' trading strategies and can improve certain dimensions of market quality.
We decompose currency returns into (permanent) intrinsic‐value shocks and (transitory) expected‐return shocks. We explore interactions between these shocks, currency returns, and institutional‐investor currency flows. Intrinsic‐value shocks are: dwarfed by expected‐return shocks (yet currency returns overreact to them); unrelated to flows (although expected‐return shocks correlate with flows); and related positively to forecasted cumulated‐interest differentials. These results suggest flows are related to short‐term currency returns, while fundamentals better explain long‐term returns and values. They also rationalize the long‐observed poor performance of exchange‐rate models: by ignoring the distinction between permanent and transitory exchange‐rate changes, prior tests obscure the connection between currencies and fundamentals.